There's been a steady drumbeat of news from IBM about acquisitions, partnerships and innovations over the past 12 months related to financial services. And while the company's interest and involvement in the sector is nothing new, those who follow Big Blue say it would be a mistake to classify the recent activity as just business as usual.

The financial services industry is at a critical inflection point, analysts say, creating business opportunities for companies that can help institutions better mine and utilize their data. IBM along with competitors such as Oracle and Hewlett-Packard are jockeying for position. "IBM has a broad footprint and broad expertise," says Rodney Nelsestuen, a senior research director at TowerGroup. "But they have a lot of competition, and it's not bad, either. The demand for data and information is growing in order to better understand customers and meet regulatory requirements; the financial services industry is undergoing change, and they all have a great opportunity that is unfolding in 2010."

To seize this opportunity, IBM went on an acquisition tear in 2009. It purchased Exeros Assets, a data discovery software firm; SPSS, which focuses on statistical analysis software; Ounce Labs for its source code analysis; RedPill Solutions for its analytics and optimization capabilities; Guardium for database monitoring and protection; and Lombardi for business process management. Meanwhile, IBM topped the list of corporate patent issuers in 2009 for the 17th year while inking new partnerships and deepening others. It announced an extension of its global strategic alliance with Temenos in November to enable large retail operations to implement core system modernization and replacement strategies. It also announced a new partnership with Odyssey Financial Technologies, a leader in wealth management software.

Greg Conley, who served two stints at IBM striking partnerships and is now on the other end of the relationship as CEO of Odyssey, says that IBM's guiding goal through acquisitions, partnerships and innovation is to outrun commoditization. "IBM does not want to be a commodity vendor of tools, but a solution provider; it wants to take industry specific knowledge and create a solution and drive value for the customer. They don't want to be selling just to the IT guys, but to the CEO and business owners. It's then that you're delivering real competitive advantage to businesses and not just solving tech problems."

To pull all these partnerships, acquisitions and research together to better coordinate its financial services offering, IBM announced in September the creation of the Banking Industry Framework. Boxley LLewellyn, director of growth initiatives for banking and financial markets at IBM, says the Banking Industry Framework will be "an organizing principal for us and the next decade's view of how we will deliver solutions."

IBM bills the Banking Industry Framework as a software technology backbone that makes a wide range of smart banking solutions possible, utilizing the full spectrum of IBM's software portfolio, including WebSphere, Tivoli, Rational, Lotus, ILOG and Information Management products. The framework also provides integration between IBM framework middleware and partner applications from key independent software vendors (ISVs). The combined IBM and ISV solutions offered by the IBM Banking Industry Framework is intended to help banking customers speed time to market, reduce development risk, lower development costs, and improve their return on investment.

Jeff Goldberg, a senior analyst at Celent, says the Banking Industry Framework fits perfectly with IBM's modus operandi: "create an overall framework and methodology-a domain-specific model they can bring to the banking industry or insurance industry, and then they fill out the technical components with technology partners or by building it themselves. It's always been a little bit of both. IBM wants to have a full story to present to customers."

Nelsestuen says CIOs are often hired by banks for their technology know-how but they lack domain expertise. This makes IBM's focus on domain knowledge particularly powerful and attractive to them. "For bank CIOs the big issue is domain expertise, not just do you know the technology, but what domain knowledge do you have."

So far about 250 banks use some component of the framework, which addresses four key areas: integrated risk management to support a holistic approach to managing financial risk, operational and IT risk, financial crimes detection and prevention, and compliance; customer care and insight to help banks build a foundation for creating a single view of the customer and enabling more effective and efficient sales and service; payments and securities to help banks progressively transform their payments operations to become more flexible and efficient; and core banking transformation that allows banks to modernize and renovate existing systems that sustain core banking functions while aligning with the changing needs of the business.

Industrial Bank of Korea (IBK) recently tapped into the second of these key areas. It wanted to differentiate itself by packaging its products and services to better suit individual customers needs. The bank already had the data necessary to tailor packages but they were scattered across numerous legacy applications making it impossible to get a holistic view of the customer. By using the Banking Industry Framework, IBK designed a single, integrated view of the customer data to ensure consistent customer information, effective marketing campaigns and improve their work processes.

Gwen Bezard, an analyst at Aite, expects that the fourth of the key areas identified by IBM-core transformation-will resonate well with banks. For 10 years IBM and competitors such as SAP have been moving away from pitching a "Big Bang," rip and replace approach to the core, to a more incremental approach. But the Bank Industry Framework does something new. Instead of just offering strategic advice and architecture design, the Bank Industry Framework brings actual technology assets to the table such WebSphere, Tivoli, Rational, Lotus, ILOG as well as partner applications. "You could argue that what IBM is doing is bringing the technology assets to enable that rather than just concepts and architecture."

For now, analysts say, IBM is mostly a big bank option. The old saw that "No one ever got fired for hiring IBM," might be true, but it's still an expensive choice. But Nelsestuen says by efficiently breaking an IT project into bite sized pieces the Banking Industry Framework may allow IBM to broaden its customer base. "Moving down market is always a challenge but if you have the technology and domain expertise the next logical step is to focus on on-demand services and one would expect that to create an opportunity for smaller banks to access their services."

While IBM has a lot of momentum, analysts say it's not all blue skies. True, the company has a big competitive lead on rivals such as Oracle and HP. It made the strategic jump to offer professional services more than 10 years ago and today service deals can account for as much as 60 percent of IBM's revenues. But rivals also covet the financial services space and are moving aggressively to mimic IBM's rounded offering of software, hardware and services. Oracle is buying Sun-Microsystems and HP has acquired EDS to add to out their offerings.

Another challenge for IBM is its size and the efficiency with which it can incorporate acquisitions, says Nelsestuen of TowerGroup. He points to the acquisition of Cognos in late 2007, arguably one of IBM's most strategic buys in the last three years. The purchase of the business intelligence company was widely seen as a defensive move after two other BI players, Business Objects and Hyperion, were purchased by SAP and Oracle, respectively. Yet, Nelsestuen says, "It was up to the people at Cognos to get integrated. The onus is on you to bring the value and get it inserted into the organization. The big issue with IBM is it's so hard to elegantly incorporate acquisitions."

But Conley of Odyssey, recalling his own insider IBM experience, notes that many companies that team up with IBM approach the relationship incorrectly. Too often, he says, a new partner views IBM as a powerful distribution mechanism for its product and loses sight of IBM's own motives, which is to sell more of its own products in conjunction with the partner's products. It is the partner's responsibility to show how packaging its product with IBM's existing products can occur and drive revenue at IBM. "Oftentimes these partnerships make for a nice press release but the deal runs aground because the software provider believes he can win the hearts and minds of the IBM sales force without embracing the IBM technology and moving to the platform. Well, guess what, they've got better things to do and they are not just there to be a sales channel. You need to have your solution part of a solution that involves a more robust involvement of IBM. Early success is key. Companies' attention spans are short in a market like this and there's a sense of urgency."

Those caveats aside, IBM is a formidable force in the financial services vertical with broad and deep expertise that is well respected in the industry. Bezard recently conducted an Aite survey of senior IT executives at 80 North American banks and found that IBM was the most highly ranked vendor in four of eight categories, far and away the best performance of any vendor. "The strong showing of IBM in our survey underscores the continued dominance of IBM in the technology world. The firm stands as the most admired ... in areas as diverse as IT services, servers, business intelligence and business process management." And, not insignificantly for IBM, it is the most admired vendor in the server category, the category that most executives-73 percent-said they would invest in during the next 24 months.

All these factors bode well for IBM in 2010. Indeed, 2009's fourth quarter results already point in the right direction. The company reported profit of $4.8 billion, or $3.59 a share, compared with $4.4 billion, or $3.27 a share, a year earlier. Revenue rose to $27.23 billion from $27 billion. Among its main business areas, IBM said total global services revenue rose two percent to $14.7 billion. IBM also reported new services-contract signings of $18.8 billion, a nine percent increase from fourth-quarter 2008, with 22 contracts valued at more than $100 million each.

Andy Miedler, senior technology analyst with Edward Jones, said the results reiterate IBM's consistent ability to maintain its business even in difficult, uncertain times. "They're an earnings-making machine,' Miedler told Dow Jones. "Over the long term, they are continuing to transform into a higher-margin, services and software company."



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